The Push to Make More Taxpayers GILTI
In 2017, Congress passed the Tax Cuts and Jobs Act (TCJA). To say TCJA was a significant change in law as it relates to U.S. persons for all types of taxpayers would be an understatement. It is the gift that keeps on giving. If those currently controlling significant portions of the legislature have their way, it will continue to be that way for the foreseeable future through changes to the global intangible low-taxed income (GILTI) rules.
Are You GILTI?
Among the significant changes to the law via TCJA was the implementation of GILTI minimum tax provisions under Internal Revenue Code Section 951A. This section requires a U.S. shareholder of a controlled foreign corporation (CFC) to include the “Net Tested Income” of such CFCs in their current income. What was broadly impactful is that this income no longer needs to be “tainted” passive-type income like Subpart F. Many taxpayers, especially ones with what we might term nominal offshore operations, were caught off guard by these provisions. What was even more surprising was the complexity of the provisions and the ongoing issuance of guidance to refine such complexities further.
Show Me Your Intangible Returns Please
The first premise of GILTI is to tax, currently, offshore earnings earned on a deemed intangible return on assets. To accomplish this, Congress allows a CFC a 10 percent deduction based on its tangible assets (known as QBAI, not to be confused with QBI) to determine its earnings. In theory, this reflects a return on offshore intangible assets. Unfortunately, this is likely not a true reflection of such return for legacy businesses with low U.S. bases in their tangible assets.
This is Low-Taxed, Your Honor
The second premise is that only “low-taxed” income should be subject to tax. Congress provided two mechanisms to achieve this. One mechanism was to allow CFCs to exclude from income entities that are deemed to be “high-taxed.” High-taxed entities were determined by using a rate that is 90 percent of the U.S. federal rate, or 18.9 percent. This is logical since the very name of the inclusion includes the words “low-taxed.” However, this exclusion ultimately became an all-or-nothing option, meaning every high-taxed entity was excluded, or none were. In some instances, such an election can be punitive.
A second mechanism was to allow a foreign tax credit (FTC) on the deemed intangible income. Under current law and the related myriad of Treasury Regulations, companies can blend the rates of their CFCs to calculate their FTC. Blending rates from high and low-taxed jurisdictions is very beneficial in determining the overall impact of a GILTI inclusion. This seems particularly true due to the fact that the calculation of earnings, based primarily on U.S. tax principles, can produce uneven effective tax rates in any given jurisdiction over time. This is true even in countries with rates significantly exceeding the U.S. rate. However, some in Congress feel otherwise.
We Object Your Honor
At a recent Senate Budget Committee hearing, the idea of implementing a country-by-country (C-by-C) calculation for determining FTCs on GILTI inclusions was presented. If such a concept were translated into legislation, a separate FTC calculation would be required for each country where a U.S. multinational had operations. The elimination of QBAI was also discussed.
The impact of a C-by-C calculation would be primarily to disallow the blending of rates between countries. What makes this especially egregious is that, as it relates to GILTI, excess FTCs are not able to be carried forward, which would create a punitive impact for multinationals operating in multiple jurisdictions. It would also be punitive when a country calculates taxable income and related taxes in any given year that is different from the U.S. taxable income calculation. For example, a certain accelerated deduction in a local country could decrease tax in a year, triggering an inclusion for that year, while increasing income in another year, which would increase taxes. The inability to carry back the excess taxes paid to a prior year would create a punitive impact.
The elimination of QBAI was also floated. In all likelihood, this would significantly increase many taxpayers’ GILTI tax burden by increasing their GILTI inclusions.
In short, if the concepts presented at this hearing were implemented, it would be unfavorable to most taxpayers with multinational operations. McGuire Sponsel’s Global Business Services team will continue to monitor developments related to GILTI and provide updates accordingly.
Greg Lambrecht, CPA is a Principal in the firm’s Global Business Services practice and advises clients on international tax matters including understanding the consequences and opportunities associated with global tax planning decisions. He also assists clients in managing increasingly complex compliance requirements of companies with international operations.
Lambrecht joins McGuire Sponsel from the Big Four with over a decade of experience leading complex international tax projects for Fortune 150 clients and over 20 years of total experience in international tax.